Equities
U.S. stock futures were modestly positive early Tuesday with traders awaiting U.S. President Donald Trump’s State of the Union address. On world markets, MSCI’s all-country index hit a two-month high helped by a strong showing by European bank and mining stocks. On Bay Street, futures were higher with tighter supply helping boost global oil prices.
“The [State of the Union] speech is going to be closely monitored by investors, keen to get an update on trade talks with China and border security, or more specifically the wall, which led to the longest ever government shutdown last month and could trigger another in just over a week,” OANDA’s Craig Erlam said in an early note.
“There have been plenty of reports that Trump is considering using emergency powers to deliver on his promise of border wall funding and this could be the platform for it, or at least a strong hint of an intention to do so.”
On the corporate front, earnings continue to roll in on both sides of the border Tuesday. On Bay Street, investors will get results from Suncor Energy Inc. after the markets close. South of the border, big names reporting include Walt Disney Co. and Snap Inc. Both of those companies release results after the end of the trading day.
In Canadian earnings, WestJet Airlines Inc. reported quarterly profit of $29.2-million or 26 cents a share in the fourth quarter, down from $47.8-million or 41 cents a year earlier. Analysts had been looking for earnings per share in the most recent quarter closer to 13 cents. Revenue rose to $1.19-billion from $1.12-billion.
Bank stocks could also get some attention at Tuesday’s open. The Globe and Mail’s James Bradshaw reports Canada’s banking regulator is proposing tougher rules governing deposits sourced online or from third-party brokers, in a move that would make banks more stable in times of stress but could also put some smaller lenders at a competitive disadvantage. The draft changes put forward by the Office of the Superintendent of Financial Institutions (OSFI) have not yet been made public. If approved, banks would be required to hold 20 per cent to 40 per cent of deposits gathered from unaffiliated brokers or internet-based accounts as a buffer against sudden withdrawals that could put a lender at risk.
On Wall Street, shares of Google-parent Alphabet Inc. shares were down more than 2 per cent in premarket trading despite earnings that topped analysts' profit and revenue expectations. The company reported earnings per share of US$12.77 compared with a loss in the year-earlier quarter when the company took a hit from changes to U.S. tax laws. Analysts had been expecting earnings in the latest quarter of US$10.87. Fourth-quarter revenue was up 22 per cent at US$39.28-billion, topping analysts' estimates of US$7.69-billion. Still, Alphabet stock took a tumble as investors focused on higher spending on video content. Alphabet chief financial officer Ruth Porat told analysts during a call that the company expected capital expenditures to moderate significantly this year. (Alphabet’s results were released after the close on Monday.)
Overseas, the pan-European STOXX 600 rose 0.94 per cent, touching its best levels since November with most major sectors in positive territory. Oil and gas shares were among the winners after BP said 2018 profit doubled to a five-year high. Britain’s FTSE 100 was up 1.44 per cent. France’s CAC 40 rose 1.03 per cent. Germany’s DAX advanced 1.23 per cent.
In Asia, China’s markets were closed for New Year. Japan’s Nikkei gave back early gains to finish down 0.19 per cent. The broader Topix edged up 0.1 per cent.
Commodities
Crude prices moved higher in early going on the expected impact of U.S. sanctions on Venezuela and production cuts from OPEC and its allies. Both Brent and West Texas Intermediate were positive with Brent moving in a day range of US$62.20 to US$63.02. The range on WTI was US$54.38 to US$55.21.
“Oil prices are better bid as the market expects U.S sanctions on Venezuela and production cuts led by OPEC+ to trump any glut,” OANDA analyst Dean Popplewell said. “However, U.S data showing a decline in factory orders is providing a cap to the market.”
Mr. Popplewell noted that OPEC supply fell this month by the biggest amount in two-years, which has helped offset limited compliance so far by non-OPEC Russia.
“While OPEC cuts, the U.S continues willing to expand its supply. However, data on Friday showed a drop in the number of U.S oil rigs on line to their lowest in eight-months, lending temporary prices some support,” he said.
Prices gains, he added, are being limited by new U.S. figures released Friday showing new orders for U.S. made goods fell unexpectedly in November, with sharp declines seen in demand for machinery and electrical equipment. “The prospects for growth in fuel demand have been clouded by poor economic data in China and U.S-China trade tensions,” he said.
For the day ahead, markets will also get inventory figures from the American Petroleum Association. Those numbers, due Tuesday afternoon, will be followed by more official inventory figures from the U.S. Energy Information Administration. Analysts are expecting to see a build of about 878,000 barrels in that report.
In other commodities, gold prices were just off one-week lows, tempered by a firmer U.S. dollar and rallying equities markets. Spot gold edged 0.1 per cent higher to US$1,313.02 per ounce, after hitting its weakest since Jan. 29 at $1,308.20 in the previous session. U.S. gold futures were down 0.1 per cent at US$1,317.70 an ounce.
“One of the things potentially capping gold’s rally here is the fact that the U.S. Federal Reserve’s dovishness points to stronger demand for riskier assets,” Marcus Garvey, analyst at ICBC Standard Bank, told Reuters.
“The big question now is how much the Fed’s position has changed and can it get more dovish... But given the fact that the U.S. domestic data is reasonably stable, there is still scope for the Fed to hike rates once this year.”
Currencies and bonds
The Canadian dollar was little changed in early going as its U.S. counterpart held recent gains ahead of the State of the Union address. The loonie was moving in a fairly narrow day range of 76.21 US cents to 76.32 US cents.
With no major Canadian economic news due Tuesday, focus will be on the broader markets, specifically Mr. Trump’s evening speech. Ahead of that address, the U.S. dollar index, which weighs the greenback against a selection of world currencies, was up 0.1 per cent at 95.98. The index is now in its fourth straight day of gains.
Elsa Lignos, RBC’s global head of FX strategy, says Mr. Trump’s focus is supposed to be unity “but most have trouble picturing it - it either means a deflated speech read from a teleprompter or veering off course with generous ad-libbling.”
She said there are a number of risks to watch for in the speech, including the possibility that he could use the address to declare a state of emergency in order to get funding to build a wall along the southern border. If that happens, she said, it would weigh on the U.S. dollar because it sets up a messy standoff with Congress. As well, she said, Mr. Trump could use the speech to strike a more hawkish tone in his stand on the U.S.-China trade talks. Finally, any more plans for infrastructure spending would be another boost to risk, she said, “though most know so far the rhetoric and the reality have been far apart.”
In bonds, U.S. Treasury yields moved higher as markets await the speech. The yield on the 10-year note was higher at 2.731 per cent. The yield on the 30-year note was also higher at 3.065 per cent.
Stocks set to see action
BP joined its competitors in posting a strong 2018 performance, with a doubling of profits driven by strong growth in oil and gas output following a large U.S. shale acquisition. Record utilization of its oil and gas fields and refining capacity further helped BP seal what was a transformational year as the aftermath of the deadly 2010 Deepwater Horizon disaster eased. But while the London-listed firm’s revenue beat forecasts, debt rose and the pace of its share buyback scheme slowed in the last quarter after it paid the first and largest tranche of the $10.5-billion BHP acquisition. BP shares rose more than 3.3 per cent in early trade, hitting their highest since early December.
Chip maker Infineon Technologies cut its forecast for full-year revenue growth on Tuesday to the bottom of its earlier range, blaming difficult markets, but expects a better second half as demand rebounds and inventories are worked off. Infineon is a leading maker of high-performance power chips used in cars, server farms, smartphones and wind turbines. Its products also help drivers avoid accidents and run on-board features in luxury vehicles. Trimming his forecast for revenue growth in the current year to September to 9 per cent, CEO Reinhard Ploss said Infineon faced weakness in its automotive markets, datacentre servers and in phones. He forecast a difficult second quarter with flat revenue after the top line declined by 4 per cent, quarter-on-quarter, in the three months to Dec. 31.
British online supermarket Ocado said investment in its partnership deals would hit short-term profits, while remaining tight-lipped about media reports of tie-up talks with Marks & Spencer. The company also reported a 21 per cent fall in full-year earnings, hit in part by new accounting rules. Though Ocado has a 1 per cent share of Britain’s grocery market, its 6.9 billion pound (US$9-billion) stock market valuation has been driven by the technology side of its business - providing third parties with the infrastructure and software to develop their own online grocery businesses.
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Economic news
(9:45 a.m. ET) U.S. Markit composite and services PMI for January.
(10 a.m. ET) U.S. non-manufacturing ISM for January. Consensus is 57.0, falling from 58.0 in the previous month.
With Reuters and The Canadian Press
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Terry Weber